Refund or CENVAT credit on input services allowed only if services are consumed in output service

Recently in the case of Kbace Tech Pvt. Ltd. Vs CCE/ CST CESTAT ruled that the refund or CENVAT credit on input services is allowed only if the services are consumed in the output service.  It is held that the Board’s Circular No. 120/01/2010-ST, dated 19-1-10 does not have the effect of amending the statute and cannot be seen as authorising sanction of refund if the credit of service tax does not relate to services consumed for providing the output service.

The Order has initiated the new battle between the tax administration authorities and judicial organs over legislative intentions behind the grant of refund of Cenvat credit on input services to the service exporter. The Latest decision has the department a reason to block the service tax refunds.

To relax the controversies revolving around the eligibility of refund claim to the service exporters, the Central Board of Excise and Customs came out with a Circular on January 19 this year, clarifying the position in favour of the various service exporters. Further, in order to support the Board’s view, the Union Budget 2010 brought retrospective amendments vide Notification No. 5/2006 (‘the Notification’) to rules governing the procedural aspects of claiming refund of unutilised Cenvat credit. However, soon after the issue of much-awaited clarifications and proposed amendments in the Notification, Bangalore CESTAT in the case of KBace Tech has shaken the very foundation of the Cenvat credit scheme that governs the eligibility of the input services for Cenvat credit.

Introduction of the levy of service tax in 1994 was the first initiative towards the unified value added tax (covering goods as well as services). The service tax being a consumption tax, input tax credit mechanism was introduced to avoid the cascading effect. Cenvat credit has been evolving and has undergone many changes over time.

In brief, earlier, Rule 5 of the Cenvat Rules allowed the refund of Cenvat credit availed on the inputs or input services only to manufacturer exporters.

Though delayed, government amended the Rule 5 and the Notification to cover service exporters under the refund scheme.
However, the amendment of the Cenvat Rules and issuance of the Notification could not ensure the smooth and hassle-free function of the Input Credit Mechanism and sanction of the refund claims for service exporters. In fact, it began the new era of the fresh litigation with regard to determination of the eligibility of refund of credit availed on input services used in relation to the exported output services.

The refund claims filed by the applicants were mostly rejected or delayed on account of the confusion pertaining to the establishment of the nexus between the input services procured and output services provided by the service exporter. The confusion was on account of the contradictory languages used in the Cenvat Rules and in the Notification. The Cenvat Rules defining the term ‘input services’ permits the availment of Cenvat credit on the input services that are ‘used for’ providing output services, whereas, the Notification while permitting the refund of Cenvat credit termed that refund on input services ‘used in’ provision of output services exported is available.

This created room for interpretation by the authorities that refund is eligible only with respect to input services, which have direct nexus with the output services as the Notification states that the input services should be ‘used in’ provision of export of services.

In order to clarify the correct position, the CBEC issued the Circular dated January 19, 2010, which clarified that there cannot be different yard sticks to determine the nexus between the input and output services under the different provisions of the service tax legislation. The different phrases used in the various provisions of service tax legislation should be construed in a harmonious manner to understand that Cenvat credit on the input services are eligible in case its absence adversely impacts the efficiency and quality of the output services.

The above Circular and the amendment in the Notification in the Union Budget were welcomed by service exporters with a hope that the long-awaited refund would now start flowing.
However, this hope has been drastically shaken by the Bangalore Tribunal in the case of KBace Tech. The Tribunal while remanding back the matters observed that:

• Section 94 of the Finance Act, 1994 (‘Act’) which empowers government to provide for rules to take Cenvat credit of only those input services that are ‘consumed’ for providing the output services;
• The provisions of Cenvat Rules (definition of input service) and the Notification widening the scope of the eligibility of Cenvat credit on input services used in provision of the output services are beyond the provisions of Section 94, which restricts the eligibility of Cenvat credit to the input services ‘consumed’ in providing the output services;
• Cenvat Rules cannot provide for credit of Service tax in respect of the services which are not consumed for providing the output services;
• Binding nature of the Board’s Circular is doubtful;
• As the recent Budget amends only the Notification and not the Statute or the Rules, hence Section 94 still prevails.

Thus, the Tribunal’s decision has provided new grounds to the field formations to continue their arguments against eligibility of refund on certain input services. This would start a new round of discussions and representations from the affected industries. Apparently, the Tribunal did not appreciate certain key aspects of the entire Cenvat mechanism. These include: Concept of consumption based tax: Service tax is a consumption based tax and to avoid the cascading effect, Cenvat Rules were introduced. The interpretation adopted in the above decision defeats the very purpose of the Cenvat Rules and the service tax legislation resulting in export of taxes.

The definition of the term ‘consumed’: The term ‘consumed’ has not been defined anywhere in the service tax legislation. The terms ‘consumption of goods’ can be easily and logically understood. However, service being intangible in nature, the term ‘consumption of service’ cannot be substantiated. The concept of ‘consumption’ does not seem to be very different from the concept of ‘usage’ in the context of services and the term ‘consumed’ may not necessarily mean narrower than ‘usage’.

No contradiction with Section 94: Section 94 of the Act authorises the Central Government to frame Cenvat Credit Rules with respect to “services consumed for” providing taxable services and not “services consumed in” providing the taxable services. The input services are always consumed by the recipient directly (i.e. consumed in) or indirectly (i.e. consumed for). The Tribunal has failed to appreciate the fact that such consumption need not be direct as much that the Act used the word “for providing the services” instead of “in providing the services”. It may be noted that if the Tribunal can consider the above harmonious interpretation, then nothing in the amended Rule/ Notification would be contradicting the provisions in the Act.

Taking a fresh look at the entire matter, it can be said that the Input Credit Mechanism, right from its introduction, has undergone the variety of changes over a period of time. It has been almost six years since introduction of the Cenvat Rules, which govern the refund of the unutilised Cenvat credit to the service exporter. However, the position as regards eligibility is not yet settled. The only victims of such legal system are the industries and ultimately the final consumers.

When elephants fight, the grass on the ground gets cleaned up. Here, it is the claimant who is at the receiving end.

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DETAILS OF THE CASE LAW

CESTAT, SOUTH ZONAL BENCH, BANGALORE,

In the case of: Kbace Tech Pvt. Ltd. Vs CCE/ CST, Appeal No. ST/304/09, Decided on: March 19, 2010

RELEVANT EXTRACTS:

19. We have considered the submissions made from both sides well as the case records, the cited case laws and the Circular d H 19.01.10. We note at the outset that all these appeals relate to case f export made by export oriented units. We also note the anxiety of the Government as reflected in the Circular dated 19.01.10, that the Government wants to refund the accumulated input credit to the exporters and zero-rate the exports.

20. In the said circular, note has been taken regarding use different phrases in the relevant rules and notifications. In addition,  we find that the expression used in the Act is also different pointed out in para-6 above, the legislature uses the expression services consumed under Section 94 (ee) and (eee). The rules made taking recourse to the statutory provisions contained in the Act the notifications issued there under have to be interpreted the notifications issued there under have to be interpreted in the context of the expression used in the Act.

21. All the rules of procedure are the handmaid of justice as held in Kailash v. Nanku – AIR 2005 SC 2441. In the State of Punjab and another Vs Shamala Murari and another, (1976) 1 SCC 719, Apex Court approved in no unmistakable terms the approach of moderating into wholesome directions what is regarded as mandatory on the principle that Procedural law is not to be a tyrant but a servant, not an obstruction but an aid to justice. Procedural prescriptions are the  handmaid and not the mistress, a lubricant, not a resistant in the administration of justice. In Ghanshyam Dass and others V. Dominion of India and others (1984) 3 SCC 46, the Court reiterated-the need for. interpreting a part of the adjective law dealing with procedure alone in such a manner as to sub-serve and advance the cause of justice rather than to defeat it as all the laws of procedure are based on this principle. It is settled principles of law that the courts when called upon to interpret the nature of the provision, may keeping in view the entire context in which the provision came to be enacted, hold the same to be directory though worded in the negative form.

22. Language employed in subordinate legislation alone most often >is not decisive, but regard must be had to the extent, subject-matter and object of the statutory provision in question, indetermining whether the same is m consonance with legislative mandate. No rule can be laid down as to whether mandatory enactments shall be considered directory only or obligatory with an implied nullification for disobedience to the statutory provision. It is the duty of Courts of Justice to try to get at the real intention of the Legislature by carefully attending to the whole scope of the statute to be considered. For ascertaining the real intention of the Legislature / the court may consider inter alia, the nature and design of the statute, and the consequences which would follow from construing it the one way or the other; the impact of other provisions whereby the necessity of complying with the provisions in question is avoided; the circumstances, namely, that the statute provides for a contmgency of the non-compliance with the provisions; the fact that the noncompliance with the provisions is or is not visited by some penalty; the serious or the trivial consequence, that flow therefrom; and above all, whether the object of the legislation will be defeated or furthered.

Rule cannot be interpreted de hors the legislation and particularly in fiscal jurisprudence if Rule departs from legislative intent that may cause peril to public revenue.

23. We find that as a part of the Budget proposal this year some amendments have been made. Notification No. 5/06-CE(NT) dated 14.03.06, issued under Rule 5 of the Cenvat Credit Rules, 2004, has been retrospectively amended as follows:-

(1) The words “in relation to” have been added in main | condition (a) of the Notification.

(2) The word “in’ contained in main condition (b) of the said Notification has been respected with “for”.

(3) The illustration given in condition 5 of the Appendix to the Notification has been deleted.

We, however, find that neither the Act, nor the Rules have been retrospectively amended.

24. Some prospective amendments have also been made to the said Notification No. 5/06-CE(NT) dated 14.3.06, requiring certification of details relating to refund claim including certification by a Chartered Accountant.

25. These changes, do not alter the fact that the expression used in the Finance Act, 1994, speaks of services consumed for providing a taxable service and the expressions used in the Cenvat Credit Rules, 2004 and in the Notification issued there under are different. The Rules and Notifications issued under the enabling power under the Act cannot expand the mandate given under the enactment and cannot make provision for allowing credit in excess of what is stipulated under the law. The rule making authority can frame rules covering a lesser area than what it is empowered to do but cannot go beyond the limits provided under the statute and make rules covering a greater area,

26.     While we fully appreciate and support the idea that the refunds in respect of unutilized and accumulated credit should be sanctioned to the exporters as expeditiously as possible, without any delay, no refund can be granted under the rules and the notifications in respect of services other than the services consumed for providing output service in view of the express language used in the statute. The Board’s Circular dated 19.01.10 cited before us does not have the effect of amending the statute and cannot be seen as authorising sanction of refund if the credit of service tax does not relate to services consumed for providing the output service. The officials sanctioning refund have to, therefore_; necessarily examine if the credit relates to services consumed for providing the output service in view of the statutory provision unless the statute is amended.

26. In the course of hearing of these appeals, both sides confirmed that since the appellants are export oriented units and are exporting the services, no examination has been done at the time the credit has been taken as to whether such credit is admissible in terms of the statutory provision and the rules and notifications made there under. It was argued before us that in the case of CST Delhi Vs. Converges India Pvt. Ltd. (supra), it has been held that there cannot be two different yard sticks, one for permitting credit and the other for eligibility for granting rebate and that whatever credit has l>e55 permitted to be taken, the same should be permitted to be utilised and if such utilisation is not possible, refund or rebate should be granted. We entirely agree with the said decision that whatever credit has been permitted to be taken, the same should be permitted to be utilised and if that is not possible, refund or rebate should be granted in case of export of output services. However, in these cases, it was clearly admitted by both sides that initially the credit was taken-by the appellant exporters on their own and the admissibility of such credit ‘ was not examined by the field officials at that stage since there was no duty payment involved on the output service exported and therefore, no assessments were made. Accordingly, we hold that before granting refund the field officials will be at liberty to verify the admissibility of the credit.

NF